New Book Explains Why Letting Government Control Money Is Killing our Economy
George Gilder's The Scandal of Money reviewed.
What is money? Why is letting government create that definition bound to lead to grief? Why are some companies “too big to fail”? Why is it that bankers and bureaucrats prosper when Main Street suffers? What is the best way out of today’s economic mess, which by now appears perpetual?
The answers are in George Gilder’s important new book, The Scandal of Money: Why Wall Street Recovers but the Economy Never Does.
In the book is a recipe for the best get-rich-quick scheme ever invented. Here’s how it works: You and I make friends in the government, then set up as a Bank. As a Bank, we hit up the Federal Reserve for a couple million, which they’ll just give us because we’re a Bank. We take that money and then loan it to the government at interest.
Here’s the best part. We dip into the interest and award ourselves healthy paychecks: well-deserved rewards for our financial acumen. It works! Bankers following this system “collected $2.2 trillion, mostly in bonuses over a seven-year period.”
It’s not all the fault of banks. “Intimidating the financial sector with constant litigation and addicted to fees and fines, regulators have turned banks into well-fed court eunuchs, periodically whipped and blandished and finally stultified.” It’s only natural that banks should lick the hand that feeds them.
The end result is that this “has transformed [banks] from a spearhead of investment in business to an obsequious role of borrowing from the Fed at near-zero rates and lending it to Treasury at rates as high as 2 percent, yielding a tidy risk-free profit expandable through leverage protected by implicit and explicit government guarantees.”
People see this and become suspicious, not of government but of “capitalism,” which is the name the press gives this ritualized system of cronyism. “Capitalism” becomes not the freedom to spend your own money as you wish, but a method for the rich to soak the poor. Is it any surprise then that we have the rise of presidential candidates like Bernie Sanders and Donald Trump, who speak to the public’s dismay over all this?
Used to be that banks would invest in businesses, some of which would succeed, many of which would fail. The failures provided knowledge — perhaps even more valuable than the successes. Failures taught us what not to do. “In an information economy, growth springs not from power but from knowledge. Crucial to the growth of knowledge is learning, conducted across an economy through the falsifiable testing of entrepreneurial ideas in companies that can fail.”
When companies become “too big” or “too important” to fail and the government rushes in to prop them up, learning does not take place. Strike that: learning does take place. Companies learn that the best way to conduct business is via ever-closer ties to the government, which in turn grows in self-importance and power.
New knowledge always “comes as a surprise.” This is why central planning can’t work. Mixing the economy with the government is a bad idea because the government itself cannot, by definition, fail, so acquiring the most valuable information (via failures) cannot take place. Stagnation or steady decay results.
Gilder pegs much of the new economics’ historical blame on the shift from the gold standard to a floating monetary policy. The “absence of a legal link between the dollar and any physical reality plunged the world into monetary anarchy.” Since money now doesn’t measure any real thing, its value can and does fluctuate wildly, both here and wherever there are floating currencies.
No one knows the value of money, which has given rise to a vast network of speculative trading in currencies. This has become so huge that by April, 2013, “a flow of some $5.3 trillion a day, more than a third of all U.S. annual GDP every twenty-four hours” is spent trading currencies. Reflect on that number. And on all the time and intellectual effort expended on what is little more than gambling.
How much better off would we be if that energy was turned into real creative work? That can only happen when the definition of money is taken out of the government’s hands and tied to reality. That means a new, old monetary policy, a return to the gold standard, and to standards like it, for instance Bitcoin. Gilder is careful to explain why gold represents this reality, via the information theory of money (details of which are beyond this review).
As it is now, “Washington has used monetary policy to effectively nationalize the Wall Street banks and subsidize their borrowing. Enormous sums of investment money are diverted from the real world of learning that builds wealth into currency manipulations and ‘investments’ in government debt. The once-great Wall Street banks in turn subsidize the political campaigns of their Washington benefactors.”
The results of which we see all about us, and which we will see at the ballot box in November.